Paul Porvaznik – Business Litigator – Page 6 – Case Notes and Summaries of Recent Cases (State and Federal Courts

Plaintiffs’ Are ‘SOL’ Based on IFTA’s SOLs

The First District recently considered when the discovery rule can mitigate the harshness of a statute of limitations [the SOL] in a fraudulent transfer case.

The plaintiffs in Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1^st) 181575-U, a judgment creditor’s former counsel and her new law firm who secured a $200K judgment against two limited liability companies, sued under the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 et seq. [the “IFTA”] alleging two members of the debtor LLCs pilfered corporate bank accounts and formed a corporation to avoid the judgment.

The judgment debtors and third party defendants moved to dismiss the IFTA claims on statute of limitation grounds and for failure to state a cause of action. The trial court granted the motion to dismiss and the plaintiff appealed.

Affirming the lower court’s dismissal, the First District noted that while an SOL motion to dismiss is normally brought under Code Section 2-619 [which involves affirmative matter], the SOL issue can be disposed of on a Code Section 2-615 [which looks at the four-corners of a pleading] motion where the complaint’s allegations make clear that claim(s) is time-barred.

An IFTA actual fraud [a/k/a fraud-in-fact] claim is subject to a four year limitations period, measured from the date of transfer. [740 ILCS 160/10(a)]. This section has a built-in discovery rule: where the fraud could not have reasonably been discovered within the 4-year post-transfer period, the fraud-in-fact claim must be brought within one year after the transfer was or could have reasonably been discovered. [¶42]

To determine whether the discovery rule preserves a too-late claim, the court considers whether an injured party has (1) sufficient knowledge that its injury was caused by actions of another, and (2) sufficient information to ‘spark inquiry in a reasonable person’ as to whether the conduct of the party causing an injury is actionable. [¶51]

Constructive fraud [a/k/a fraud-in-law] claims, by contrast, must be brought within 4 years of the transfer. There is no discovery rule that extends the limitations term.

Looking to the plain text of IFTA Section 10, the First District affirmed the trial court’s dismissal of the plaintiffs’ constructive fraud claims. It held that the IFTA statute of limitations runs from the date of transfer, not, as plaintiffs argued, from the judgment. [¶48]

The Court then rejected plaintiffs’ assertion that IFTA’s discovery rule saved the otherwise time-barred actual fraud claims. It found the plaintiffs failed to allege specific facts or a chronology as to when they reasonably learned the defendants’ diverting funds from the corporate debtors’ accounts. As a result, the Court affirmed trial court’s dismissal of plaintiffs’ actual fraud claim.

The Court also nixed the plaintiffs’ related argument that the discovery rule applied based on the obstructionist actions of their former client [from whom the IFTA claim was assigned]. It made clear that the fraudulent concealment of a cause of action must be based on the conduct of thedefendant, not a third-party. The lone exception is where the person concealing a claim is in privity with or an agent of the defendant. In such a case, the statute of limitations period can be tolled. [¶59]

Here, the plaintiffs failed to plead facts that the former client/underlying creditor acted in concert with the judgment debtor or the transferees.

Take-aways:

Some key take-aways from the Anderson Law LLCcase include that in a fraudulent transfer case, the four-year limitations period runs from the date of transfer, not from the date of the underlying judgment.

The case also makes clear that it is the plaintiff’s burden to successfully invoke the discovery rule to breathe life into a stale IFTA fraud-in-fact claim. [The one-year discovery extension period doesn’t apply to fraud-in-law claims.] If a plaintiff fails to plead specific facts to carry its burden of demonstrating that its time-barred claim should be saved by the discovery rule, its claim is subject to Code Section 2-615 dismissal.

E-Mails, Phone Calls, and Web Activity Aimed at Extracting $ From IL Resident Passes Specific Jurisdiction Test – IL First Dist.

In Dixon v. GAA Classic Cars, LLC, 2019 IL App (1^st) 182416, the trial court dismissed the Illinois plaintiff’s suit against a North Carolina car seller on the basis that Illinois lacked jurisdiction over the defendant.

Reversing, the First District answered some important questions concerning the nature and reach of specific jurisdiction under the Illinois long-arm statute as informed by constitutional due process factors.

Since the defendant had no physical presence or office in Illinois, the question was whether the Illinois court had specific jurisdiction [as opposed to general jurisdiction] over the defendant.

Specific jurisdiction requires a plaintiff to allege a defendant purposefully directed its activities at the forum state and that the cause of action arose out of or relates to those contacts. Even a single act can give rise to specific jurisdiction but the lawsuit must relate specifically to that act. [¶ 12]

In the context of web-based companies, the Court noted that a site that only imparts information [as opposed to selling products or services] does not create sufficient minimum contacts necessary to establish personal jurisdiction over a foreign defendant. Here, though, the defendant’s site contained a “call to action” that encouraged visitors like the plaintiff to pay the defendant. [¶ 14]

The court found that plaintiff’s allegations that defendant falsely stated that the Bronco’s frame was restored, had new brakes and was frequently driven over the past 12 months [when it hadn’t] were sufficient to allege a material misstatement of fact under Illinois fraud law. It further held that fraudulent statements in telephone calls are just as actionable as in-person statements and can give an Illinois court jurisdiction over a foreign defendant. [¶ 17]

Viewed in the aggregate, the plaintiff’s allegations of the defendant’s Illinois contacts were enough to confer Illinois long-arm jurisdiction over the defendant.

The plaintiff alleged the defendant (i) advertised the Bronco on a national website, and (ii) e-mailed and telephoned plaintiff several times at his Illinois residence.

Next, the court considered whetherspecific jurisdiction over the defendant was consistent with constitutional due process considerations.

The due process prong of the personal jurisdiction inquiry focuses on the nature and quality of a foreign litigant’s acts such that it is reasonable and fair to require him to conduct his defense in Illinois.

Factors the court considers are (1) the burden on the defendant to defend in the forum state, (2) the forum’s interest in adjudicating the dispute, (3) the plaintiff’s interest in obtaining effective relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of the case, and (5) the shared interests of the several states in advancing fundamental social policies.

Once a plaintiff shows that a defendant purposely directed its activities at the forum state, the burden shifts to the out-of-state defendant to show that litigating in the forum is unreasonable.

The Dixon court held the defendant failed to satisfy this burden and that specific jurisdiction over it was proper.

Next, the Court declined to credit defendant’s Terms & Conditions (“T&C”) – referenced in the Defendant’s on-line registration form and that fixed North Carolina as the site for any litigation.

Generally, one written instrument may incorporate another by reference such that both documents are considered as part of a single contract. However, parties must clearly show an intent to incorporate a second document.

Here, the court found such a clear intent lacking. Defendant did not argue that it sent the T&C to Plaintiff or referenced them in its multiple e-mail and telephone communications with Plaintiff.

The court also pointed out that defendant’s registration form highlighted several of the T&C’s terms. However, none of the featured [T&C] terms on the registration form mentioned the North Carolina venue clause. As a result, the bidder registration form didn’t evince a clear intent to incorporate the T&C into the contract.

Afterwords:

A foreign actor’s phone, e-mail and on-line advertisements directed to Illinois residents can meet the specific jurisdiction test;

Where a Terms and Conditions document contains favorable language to a foreign defendant, it should make it plain that the T&C is a separate document and is to be incorporated into the parties’ contract by using distinctive type-face [or a similar method];

If the defendant fails to sufficiently alert the plaintiff to a separate T&C document, especially if the plaintiff is a consumer, the defendant runs the risk of a court refusing to enforce favorable (to defendant) venue or jurisdiction provisions.

Presumption of Fraud Involving [Power of Attorney] Agent Trumps General Rule of Joint Account Donative Intent – IL 2nd Dist.

In Estate of Gerulis, 2020 IL App (3d) 180734, two siblings [Petitioners] sued their brother [Respondent] for allegedly looting their father’s [Decedent] estate to the tune of several hundred thousand dollars.

Underlying Facts

Shortly after moving to Illinois from Florida to live with Respondent [his eldest son], Decedent and Respondent opened multiple bank accounts and purchased certificates of deposit from an Illinois bank, [a bank where Respondent’s wife happened to work] and transferred over $60K from two of Decedent’s Florida bank accounts to the same Illinois banks. Respondent then withdrew monies from the Illinois accounts to pay for home improvement costs and other personal expenses.

In addition, shortly after Decedent’s move to Illinois, Respondent deposited over $300K from the sale of Decedent’s Florida condominium in one of the Illinois accounts.

Lower Court Result

Petitioners sued Respondent alleging he breached fiduciary duties to Decedent by initiating various transfers of money from the estate to Petitioners’ detriment. They further alleged Respondent exerted undue influence over Decedent by convincing him to change his will after he moved in with Respondent.

The parties filed cross-motions for summary judgment. The trial court entered summary judgment for Petitioners and (1) ordered Respondent to pay back the estate over $900,000 (including nearly $300,000 in prejudgment interest), and (2) voided Decedent’s changed estate planning documents [a revised will, trust, and power of attorney that favored Respondent over Petitioners].

Appellate Decision

The Second District affirmed in part the trial judge’s order.

Under Illinois law, an individual holding a power of attorney [POA] is a fiduciary as a matter of law. The person designated as a POA agent owes a fiduciary duty to the principal – the person making the designation. The fiduciary relationship between a principal and agent under POA is triggered once the POA document is signed.

Presumption of Fraud – POA Agent Benefits from Transaction

This fiduciary relationship prohibits the agent from obtaining a selfish benefit for himself, and if the agent does so, the transaction is presumed fraudulent.

Under a POA, any conveyance of a principal’s property that financially benefits the agent is presumed fraudulent. This includes transfers directly to the agent as well as those to third parties engineered by the agent.

Once this presumption attaches, the burden shifts to the agent to disprove the fraud by clear and convincing evidence To satisfy this burden, the agent must establish he acted in good faith and did not betray confidence placed in him. If the agent meets this burden, the challenged transaction is upheld. If the agent doesn’t, the transaction is set aside.

Factors a court considers when determining whether an agent has rebutted a presumption of fraud include (1) whether the fiduciary make a full disclosure to the principal of key information, (2) whether the fiduciary paid adequate consideration for the transfer, and (3) whether the principal had competent and independent advice.

The trial judge found (a) the multiple transfers from Decedent’s Florida accounts into the various Illinois accounts and (b) Decedent’s gifting $130,000 to Respondent occurred during the existence of the POA fiduciary relationship. The Court also noted that Respondent plainly benefitted from the transfers. These events activated the presumption of fraud.

The appeals court agreed with the trial judge that Respondent failed to carry his burden of showing the transfers were in good faith.

Principal’s Mental Competence Won’t Always Defeat Presumption of Fraud

The Court first held it wasn’t enough that Decedent was mentally competent when the challenged transfers occurred. This was because Respondent couldn’t prove he was acting at direction of the Decedent or that Decedent even knew Respondent transferred Decedent’s Florida bank account funds to the Illinois accounts under Respondent’s [and his wife’s] control.

The Court then cited a lack of evidence of consideration or compensation paid [from Respondent to Decedent] to support the transfers. Absence of consideration for a transfer [no quid-pro-quo] can trigger a court’s heightened scrutiny of a POA agent’s conduct.

Joint Bank Accounts

With a joint account [the FL and some of the IL accounts were joint accounts] there is a presumption of donative intent: each joint account holder gifts to the other holder the joint account funds.

So long as funds are deposited and a joint tenancy account contract is signed by the joint owners, the presumption of donative intent prevails and can only be defeated by a showing of clear and convincing evidence.

This is especially so where a joint account is opened before a fiduciary relationship is formed.

When this happens [joint accounts are opened before a POA, e.g.], the two presumptions [presumption of fraud for POA transaction v. presumption of donative intent with joint bank accounts] “cancel each other out” and the Court decides the breach of fiduciary duty objectively on a fresh factual record.

Here, the fiduciary relationship between Decedent and Respondent attached before the Florida account funds were transferred to Illinois and the opening of the various Illinois accounts. As a result, the presumption of fraud was triggered before the Illinois joint accounts were opened. The Court therefore held that the POA fraud presumption took primacy over the general rule of mutual gifts for joint accounts.

Take-aways:

The POA fiduciary relationship is triggered upon signing the POA document;

To rebut a presumption of fraud, a POA agent must do more than show his principal was mentally competent. Instead, the agent must prove the principal authorized, directed or had actual knowledge of a challenged act;

With a joint bank account, where a fiduciary relationship predates the opening of such an account and the POA agent benefits financially from the account [i.e. withdraws funds], the presumption of fraud wins out over the conflicting presumption that a gift between joint account holders was intended.

Share this:

Share this:

Share this: